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(RPT)MNI INTERVIEW: ECB To Hike To 4% - Ex-Bank Of France Economist


The European Central Bank is likely to raise to interest rates to 4% in the absence of a stronger-than-anticipated economic downturn or a financial crisis, a former staff economist at the Bank of France told MNI.

While energy prices are now decreasing, food prices are still being driven higher by supply problems, with only government intervention likely to make much difference, said Eric Monnet, an economist at the Banque de France from 2013 to 2019 and now professor of economic history at Paris’s School of Advanced Studies in the Social Sciences. The ECB, which has raised its deposit rate to 3.25%, has pointed to corporate profits as being a significant culprit behind inflation, but this could not be addressed by the central bank, he noted.

“I see the current situation as a balancing act between central banks and governments. As long as governments are not taking sufficient action to counter inflation, especially on food, the ECB has no choice but to send a strong signal that they are the institution in charge,” he said in an interview. “The only reason the ECB would stop raising interest rates would be a very strong economic downturn - more than anticipated - or a very strong financial crisis. That may also happen. Or strong decisions by governments to take measures against inflation.” (See MNI SOURCES: Most At ECB See 4% Rate As Only Outside Chance)


While energy prices have decreased due to factors including weaker demand, governments have no plan to tackle high food prices, Monnet said.

“The ECB has been pushing the idea that actually it's not only an issue of supply factors, it's also an issue of profit margins, and there is evidence now that that might be true. But you don't see what governments are ready to do [about it],” he said, noting that food was now the main driver of French domestic price pressures.

“France was at the bottom of the average inflation rate table for a year because energy price inflation was lower than elsewhere - partly due to government measures, but also because we are less dependent on external sources of energy. Now France has reached the average European level, because food has replaced energy as the main driver of inflation,” he said.

Differences between national inflation rates within the eurozone are an added complication for the ECB, he said, adding that the central bank was likely to introduce some special refinancing or preferential rate for green investment as it tightens overall and that some countries will be harder hit than others by monetary tightening.

“The ECB will always tell you that they don't have to take [differences between national inflation rates] into account, which is true. It would be a problem if they did. But as far as raising interest rates creates side-effects, currently the most obvious ones would be financial,” he said, pointing to the housing sector as a potential source of future stress.


“Domestic credit is still quite insulated from international spillovers, especially housing credit, but asset prices are not. So the big question that is not very explicitly discussed by central bankers right now is what will they do if there is an issue with asset prices on the stock market, but also in house prices?”

Some protection from tightening conditions abroad comes from a larger ECB balance sheet, though its decision this month to increase the pace of its asset runoff to around EUR25 billion from July is unlikely to have a huge impact on markets, said Monnet, who will present a paper on central bank balance sheets and international spillovers later this month.

MNI Frankfurt Bureau | +49-69-720-146 |
MNI Frankfurt Bureau | +49-69-720-146 |

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